Mergers and Acquisitions/Introduction/Course Outline

The Role of the Transactional Lawyer

Adding value to the Transaction
- By structuring the transaction to enhance financial return, reduce risk and limit costs.
- Using multiple skill sets to shepherd the Transaction.
- Working as a member of a team, including the client and other professionals.
- Facilitating the consummation of a beneficial Transaction.
Reduction of Risk
- Planning and assisting the investigatory due diligence process
- Identifying business, regulatory and legal risks
The attorney as the negotiator
- Enhancing value through negotiation
- Negotiating the allocation of financial and legal risk between the parties
- Creating mutually beneficial solution
  - Empathize with the position of both the Buyer and the Seller
  - Be a facilitator who finds solutions to issues which accommodates both the Buyer and Seller
Documentation of a Transaction
- Providing congruency among the expectations of the business client, the negotiated transaction and the documentation of the transaction.
- Facilitating the transaction by coordinating the documentation with the results of due diligence
- Using familiar formats and procedures of documentation that reflect the Transaction.

Motivations for Mergers and Acquisitions

Exogenous and Endogenous factors Affecting, Motivating and Dissuading Acquisitions
Motivations of the Purchaser and the Seller of a Business
- The acquisitive business
- The motivated seller

Merger and Acquisition Basics

Mergers vs. Acquisitions
Horizontal vs. vertical vs. conglomerate
Public vs. Private Targets
Basic Acquisition Structures
- Stock Acquisition
- Asset Acquisition
- Stock Merger

Metamorphosis of an Acquisition/Divestiture

General Stages of Selling a Business
The Issue of Confidentiality and the Utility of Confidentiality Agreements

Elementary Accounting for Business Lawyers

The concept of Generally Accepted Accounting Principles (GAAP).
- The role of the Financial Accounting Standards Board
- The role of the Securities and Exchange Commission

Formation and analysis of Financial Statements
- Income Statement, Balance Sheet and Statement of Cash Flows
- Analysis of Notes to Financial Statements
- The accounting for Goodwill and Other Intangible Assets

Accounting for Acquisitions
- Former Rules APB No. 16 and 17
  - Criticism of Pooling of Interests Accounting
  - Possible alternative methods of Accounting
- New Rules FAS 141 and 142
  - Elimination of Pooling of Interest for Business Combinations
  - Elimination of prescribed amortization of goodwill
  - The new concept of “Impairment” of goodwill
  - Effect upon M&A activity

VI. Elementary Valuation Techniques

A. Valuation Analysis

1.

      Balance sheet analysis

   a)                 Liquidation Value  
   b)                 Replacement Value

    2.    Value Based upon Multiples of Earnings or Cash Flow

   a)                 The concept of EBITDA  
   b)                 Adjustments to EBITDA

     3.      Value Based upon Comparable Companies or Transactions

     4.      Discounted Cash Flow Analysis

   a)                 Determination of future cash flow
   b)                 “Add-Backs” to determine seller’s cash flow  
   c)                  Methods for the Determination of the Discount Rate

B. Synergistic Transactions

1.

      Identification of synergies

   a)                 Market synergies  
   b)                 Cost synergies

   2.        Allocation of synergistic benefits between the parties 
   3.        Relationship to valuation analysis 
   4.         Relationship to Structure of Purchase Price

VII. PRELIMINARY NEGOTIATIONS, INVESTIGATION AND

       THE LETTER OF INTENT

A. Preliminary Contact and Negotiations

1.

        Confidentiality Agreements  
  2.

        The Confidential Memorandum phase 
  3.

        The “auction” process

B. Letters of Intent

1.

      Pros and Cons from the perspective of Buyer and Seller  
  2.

      Its “non-binding” effect
  3.

      Binding provisions

   a)        Exclusivity provisions  
   b)       Cooperation with due diligence process

    4.       Other typical provisions

VIII. STRUCTURING THE TRANSACTION

A. Considerations for the structure of the transaction

1.

         Acquisition and assumption of assets, contracts, obligations and liabilities  
  2.

        Accounting issues
  3.

        Tax issues

B. General Description of Basic Acquisition Structures

1.

      The asset purchase of a business
  2.

      The stock purchase
  3.

      The cash-out merger
  4.

      The stock for stock merger

C. The Asset Purchase

  1.       Issues regarding acquisition of assets

   a)                 Contracts  
   b)                 Other Assets

  2.     Assumption of liabilities and obligations

   a)                 Liabilities intended to be assumed  
   b)                 Liabilities not intended to be assumed  
   c)                 The Seller’s problem with non-assumed liabilities

   3.      Tax Consequences

   a)                 The concept of “stepped up” basis in tangible and intangible acquired assets  
   b)                 The concept of double taxation to Seller’s shareholders

D. The Stock Purchase

   1.       Issues regarding acquisition of assets and assumption of liabilities

   a)                 Buyer’s problem of assumption of unwanted, contingent and unexpected liabilities  
   b)                 Retention of assets intended to be retained by the Shareholders of the Target

    2.     Problem of multiple shareholder parties to Acquisition Agreement

E. Asset vs. Stock Transaction from the Perspective of the Buyer and Seller

F. The Cash-Out Merger Transaction

1.

     Forward Mergers
  2.

     Reverse Mergers

G. Tax Deferred Reorganizations

1.

      A Reorganization  (Merger)
  2.

      B Reorganization  (Stock for Stock)
  3.

      C Reorganization (Assets for Stock)

H. Special Tax Issues and Opportunities Involving S Corporations

I. Other Tax Concepts

1.

     Section 338 Elections
  2.

     Installment Sale
  3.

      Treatment of Contingent Purchase Price and Earn-Outs

IX. DOCUMENTATION OF THE TRANSACTION

A. The Definitive Acquisition Agreement

1.

       The anatomy of a typical acquisition agreement
  2.

        Definition of what is being acquired

B. Purchase price payment provisions

1.

       Payment at closing
  2.

       Installment payments
  3.

       Seller financing
  4.

       Closing and post closing adjustments to the Purchase Price
  5.

       Contingent purchase price provisions

C. ALLOCATION OF RISK BETWEEN BUYER AND SELLER

1.

      Due Diligence Investigation

   a)                 The investigation of a potential transaction
   b)                 Confidentiality concerns  
   c)                  Process of facilitating or conducting due diligence  
   d)                 Review of a Due Diligence Checklist

   2.      Representations, warranties and indemnities

   a)                 The negotiated allocation of risk

       (1)               Certain common concepts  
       (2)               The issue of “materiality”  
       (3)               “Material adverse change”  
       (4)               “Ordinary course of business”  
       (5)               “to the best of knowledge”

   b)                 Specific representation and warranties

       (1)               Authority
       (2)               Title to assets  
       (3)               Financial statements  
       (4)               Unrecorded unknown or contingent liabilities  
       (5)               Quality of certain assets

           (a)               Accounts receivable  
           (b)               Inventory

       (6)               Intellectual property  
       (7)               Transaction is not effected by existing agreements  
       (8)               Taxes
       (9)               Absence of certain changes or events

   3.       Indemnity provisions

   a)                 Security for indemnity  
   b)                 Time limitations  
   c)                  “window” (threshold) and “basket” (deductible)
   d)                 limitation periods for indemnification provisions

  4.       General issues regarding successor liability

   a)                 Product liability issues  
   b)                 Practical non-legalistic successor issues  
   c)                  The role of insurance to protect against potential liability

D. Covenants

1.

     Manner of conducting business until closing
  2.

     Cooperation and facilitating the closing of the transaction

E. Conditions for Closing and Termination

1.

      Typical conditions for Closing

   a)                 Compliance with covenants  
   b)                 No breach of representations and warranties

       (1)               The issue of minor breaches  
       (2)               Breaches that will cause a material adverse effect

   c)                  Compliance with legal requirements

       (1)               Regulatory requirements  
       (2)               Contractual consents

   d)                 Necessary corporate approvals in the context of publicly held corporation

   2.      Time limitations  
   3.      Termination provisions

X. PARTICULAR RECURRING LEGAL AND BUSINESS ISSUES

A. Labor issues

1.

     Union recognition issues
  2.

     The “successors and assigns” issue

B. Retention of Employees

C. Issues Relating to Intellectual Property

D. Environmental issues

XI. Financing the transaction

A. Determination of the Amount of Financing Necessary to Complete a Transaction

B. Basic Financing Techniques

1.

     Tranches of debt

   a)                 Secured Debt  
   b)                 Unsecured Senior Debt  
   c)                  Subordinated Debt  
   d)                 Mezzanine Debt  
   e)                 Equity Financing

   2.     Seller Financing

C. Special issues related to highly leveraged transactions

1.

     Statutory and Common Law Fraudulent Conveyances
  2.

     §548 of the Bankruptcy Code

XII. ISSUES RELATING TO THE ACQUISITION OF A PUBLICLY HELD

       CORPORATION

A. Alternate Processes Of Acquiring A Publicly Held Company

1.

      Negotiate a Merger Agreement (Cash or for Stock)  
  2.

      Tender Offer Followed by a Merger  
  3.

      Three-piece Suit

   a)                 Acquire or lock-up significant stock ownership  
   b)                 Tender Offer at the Same Price  
   c)                  Back-end Merger

B. Security Law Issues

1.

     Regulation of Open Market Purchases (§ 13(d))
  2.

     Tender Offers Under the Securities and Exchange Act (The Williams Act)

C. State Anti-Takeover Provisions

D. Duties of the Board of Directors

1.

          Duty of Loyalty and Duty of Due Care (Van Gorkam, et. al)
  2.

         Application of the Business Judgment Rule
  3.

        Revlon Duties
  4.

       The "Entire Fairness" Test and Follow-Up Mergers

E. The Friendly Negotiated Merger

1.

      The Process
  2.

      Techniques favoring the friendly suitor

   a)                 By a No Shop Clause
   b)                 By a Lock-Up on the Target’s Stock  
   c)                  Reservation of Important (Crown Jewel) Assets  
   d)                 Termination or Break-Up Fee  
   e)                 Poison Pill Used Against Competitors (But Not Against Buyer)

    3.    The Fiduciary Duties of the Board in the Context of a Friendly Sale

   a)                 The "Fiduciary Out" provision  
   b)                 The continuing duty to Auction

F. Defensive Techniques and the Response to the Hostile Offer

1.

      The ability of a Board to "Just Say No" to an uninvited offer
  2.

      The techniques and legality of the "Poison Pill" defense
  3.

      Obligation of the Board of Directors to redeem Poison Pill shareholder rights
  4.

       The allocation of authority among the Board, the public shareholders, and the court system in determining the outcome of hostile tender offers

G. State Anti-Takeover Provisions

H. Second Step Freezeout Mergers

XIII. ANTITRUST ASPECTS OF ACQUISITIONS

A. Principal Antitrust Laws Governing Mergers (§7 of the Clayton Act)

B. Determination of an "undue share of market"

1.

     Definition of the relevant market
  2.

      Economic basis for determination of concentration of the Market (DOJ/FTC and NAAG Guidelines)
  3.

      Common defenses against assertion that acquisition violates Antitrust laws

C. Hart-Scott-Rodino Premerger Notification Requirements